Glen­core’s mas­sive plan to bust debt

Finweek English Edition - - FEEDBACK - BY DAVID MCKAY

If any more proof were needed of how the world’s largest in­vestors have be e n sp o ok e d by t he com­mod­ity mar­ket melt­down, look no fur­ther than Glen­core’s enor­mous $10.2bn (R142bn) debt re­duc­tion plans un­veiled on 7 Septem­ber.

Ivan Glasen­berg, CEO of Glen­core, said in an in­ter­view with Fin­week that his com­pany’s share­hold­ers were wor­ried me­tal prices could de­te­ri­o­rate fur­ther – a view he doesn’t per­son­ally hold – but one that is ref lec­tive of broad mar­ket per­cep­tion. As a re­sult, Glen­core is to cut debt to just above $20bn.

“We don’t think it [the mar­ket] will go lower. If it does, and we’re wrong, it can’t go that way for long be­cause a lot of pro­duc­ers will then go cash neg­a­tive and there will be clo­sures. That is a dooms­day sce­nario that I don’t be­lieve will come,” he said.

Nonethe­less, Glen­core’s share­hold­ers – some of whom are the largest in­vestors in the world such as Le­gal & Gen­eral, Capita l Re­search, a nd Nor way’s sov­er­eign pen­sion fund – in­sisted the com­pany bet­ter its $27bn net debt tar­get.

The out­come is a mul­ti­pronged i ni­tia­tive t hat sees cash outf lows staunched by sus­pend­ing the next two div­i­dend pay­ments (the f inal 2015 pay­out and the 2016 in­terim), cap­i­tal ex­pen­di­ture cuts, as­set sales, and a $2.5bn eq­uity is­sue.

Steve Kalmin, Glen­core CFO, said the eq­uity is­sue could take a num­ber of forms – “we have a dozen op­tions” – rang­ing from a vanilla rights is­sue, to a book-build, or a con­vert­ible bond.

What­ever the route taken, the steps will be painful for in­vestors as Glen­core will both ex­cise yield by cut­ting the div i dend while di l ut­ing ex i st i ng share­hold­ers’ is­su­ing eq­uity. “They [the debt re­duc­tion mea­sures] are clearly de­signed so that the com­pany can op­er­ate in cur­rent or ma­te­ri­ally worse mar­ket con­di­tions,” said Bar­clays Cap­i­tal, adding that Glen­core would also hope to get “short-sellers off their back”. Shares in Glen­core were 5% higher on the day of the an­nounce­ment but at the time of writ­ing are still 10% lower over the last seven days.

Glasen­berg’s view that share­hold­ers’ harum-scarum at­ti­tude to the mar­ket is un­founded is based on the no­tion that me­tal prices will re­spond to the ba­sic short­age of me­tal as pro­duc­ers cut back.

“Just look at the cop­per cuts and the fall in grades. All this ton­nage is be­ing taken off the mar­ket, which will even­tu­ally have a pos­i­tive ef­fect on price,” he said, adding that although the world was pre­dom­i­nantly neg­a­tive about China, cop­per con­sump­tion had nonethe­less in­creased by 2% to 3% this year while the group’s or­der book in China was “look­ing stronger in H2 [sec­ond half of the fi­nan­cial year]”.

Mar­ket f un­da­men­tals, how­ever, seem to play sec­ond fid­dle to the kind of in­vestor sen­ti­ment that sent Glen­core back to its debt re­duc­tion plans, es­pe­cially in the plat­inum group me­tal mar­ket.

“I ’m not su r e i f a ny­one does fun­da­men­tal anal­y­sis any­more,” said Ter­ence Good­lace, CEO of Im­pala Plat­inum (Im­plats), at the firm’s re­cent year-end re­sults an­nounce­ment. He was be­ing some­what face­tious, but the ex­as­per­a­tion is plain.

“There is a huge dis­con­nect in what we are see­ing with the prices and what is hap­pen­ing in the mar­ket. Of all our cus­tomers, not one has re­jected any me­tal,” Good­lace said. “We do know that de­mand is go­ing to be muted, but we still be­lieve that there will be sup­ply deficits in time.”

In the mean­time, while the mar­ket re­mains in a funk over the ex­tent of me­tal price weak­ness, short-sellers of min­ing shares are hav­ing a field day – one of the rea­sons why Glen­core made its an­nounce­ment, ac­cord­ing to Investec Se­cu­ri­ties.

“There is a dis­tinct smell of smoke in the air as Au­tumn is upon us in Lon­don and darker days mean a more dis­torted view in the shav­ing mir­ror,” said the bank. “We think that the Glen­core move could be con­strued as a mas­ter­piece of spin. [...] This plan ap­pears de­signed to paral­yse the short-sellers, and so far it ap­pears to have worked.”

THE STEPS WILL BE

PAINFUL

FOR IN­VESTORS AS GLEN­CORE WILL BOTH EX­CISE YIELD BY CUT­TING THE DIV­I­DEND WHILE DI­LUT­ING EX­IST­ING SHARE­HOLD­ERS’ IS­SU­ING EQ­UITY.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.